Morningstar Magazine - June/July 2017 - 32

Spotlight: The Future of Investing

The Death of Active Management
Has Been Greatly Exaggerated
Active investing will never die, but it's
being forced to evolve.

PASSIVE

Ben Johnson

It is no secret that actively managed funds
are struggling ( E X H IB IT 1 ). Over the three-year
period ending April 30, U.S.-domiciled
actively managed mutual funds and exchangetraded funds witnessed collective outflows
of nearly $514 billion. Passively managed mutual
funds and ETFs collected nearly $1.57 trillion
in net new money during that same span. What
began as more discerning culling of positions
in underperforming U.S. stock funds has become
more widespread. For example, during the 12
months ending Jan. 31, investors pulled $99 billion
from funds that beat their Morningstar Category
indexes over that same period.1
Are we approaching the End of Days for active
management? I don't believe so. In my opinion,
active management will never die. There will
always be investors who hope for something better
than getting the market's return net of a small
fee-it's human nature. But active management
must continue to evolve. Here, I'll take a closer
look at two ways in which active management has
changed in recent years as evidenced by:

allocation decisions are increasingly implemented
using ETFs and index mutual funds. The managers
making these decisions are doing so in a number
of different settings and with varying degrees of
activity. These range from broadly diversified
strategic asset-allocation models that are managed
at intermediary platforms' home offices to
so-called robo-advisors and ETFs of ETFs. Among
these actors, the preference for passive is
strong. In trying to generate alpha by recombining
various beta building blocks, many asset allocators
want to take ownership of all active decisionmaking rather than outsource it to a traditional
security selector.

Both phenomena demonstrate that active
management is alive and well and that
the distinction between active and passive is
as blurry as ever.
Investors Are Getting Active With Passive

The objects of many active managers'
decision-making process are changing. Instead of
choosing between Coca-Cola KO and Apple
AAPL, many active managers are deciding between
U.S. large caps and U.S.-dollar-denominated
emerging-markets debt. These active asset-

The growth of these model-builders is most readily
measured by the increase in assets under
management of target-date funds, the assets
under management or advisement in ETF managed
portfolios, and the amount of money managed on
digital advice platforms (aka robo-advisors).
Assets in U.S.-domiciled target-date funds stood at
$880 billion as of the end of 2016.² Of that sum,
39%, or $343 billion, was invested in target-date
series that use passive funds exclusively. These

EXHIBIT 1

Active Is on the Ropes Assets in active strategies are plummeting, while
passive thrives.
01/1994-03/2017

Passive

Trailing 12-Month
Estimated Net Flows
+800
USD Bil
+643.7

Active

+400

0
-267.9

1 The growth in the active use of passive funds.
2 The expansion of a class of nominally passive

funds that make active bets.

-400
1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Assets Under Management

USD Bil

Morningstar June/July 2017

2016

Source: Morningstar.

1 Ptak, J. 2017. "Loveless: Even Winning Funds Are Bleeding Assets" Morningstar. March 28, 2017. http://news.morningstar.com/articlenet/article.aspx?id=798866
600.0
2 Holt, J. 2017. Morningstar Target-Date Fund Landscape 2017. https://corporate1.morningstar.com/ResearchLibrary/article/803362/2017-target-date-fund-landscape/

2014

450.0

Estimated Net Flows
70.0
USD Bil
52.5

http://news.morningstar.com/articlenet/article.aspx?id=798866 https://corporate1.morningstar.com/ResearchLibrary/article/803362/2017-target-date-fund-landscape/

Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2017